Investments

Coca-Cola Leads Global Consumer Brand Rankings

According to Kantar Worldpanel, Coca-Cola (KO) leads their recent ranking of global fast-moving consumer goods (FMCG) brands:

“Kantar Worldpanel’s Brand Footprint Ranking reveals the strength of brands in 32 countries around the world, across the food, beverage, health and beauty and homecare sectors.”

Kantar Worldpanel Brand Footprint Report

As I’ve covered in some (okay, so actually many) prior posts, businesses that sell well-known, trusted, small-ticket consumer goods with great brands and broad-based distribution capabilities tend to also have attractive economic characteristics over the longer run.

Small-ticket consumer goods — in particular those with excellent brand recognition and substantial distribution strength — frequently have sustainable competitive advantage, pricing power, and, ultimately, desirable core business economics.

Unfortunately, the stocks of many of the great consumer goods franchises have become, unlike several years ago, at least a bit expensive.

Here are the top five brands according to the report:

Even though Coca-Cola has the top spot, it is Unilever that has what seems an astonishing 15 of top 50 global brands:

So these 5 companies own 70% of the top 50 brands.

Of these companies, all but Coca-Cola’s stock comfortably outperformed the S&P 500 over the past 15 years. Check other longer time frames and it becomes obvious that more than solid stock performance among these great franchises is hardly unusual (especially if the initial valuation was not excessive). In fact, though there will always be exceptions, the best among these high quality franchises — those with the great brands and strong distribution — have generally done quite well over longer periods of time.

Coca-Cola’s underwhelming stock performance is not a reflection of poor business performance. In fact, the business did just fine. It’s more a reflection of an extraordinarily high valuation back in 1998. It’s as good an example as any that, even for a very high quality business, paying a discount to the current intrinsic value (i.e. not what it might be worth some day), conservatively estimated, matters if an investor wants better than satisfactory investment results at reduced risk.

Occasionally, I’ll hear someone argue that the current share price of a particular stock is justified because the future business prospects are unusually good; that it eventually will be intrinsically worth that much some day.

Maybe, but investing is not about whether valuation might be justified (or even more than justified) some day.

It’s instead about which well understood investment, among the alternatives, will provide the most attractive returns considering the specific risks.
(What is well understood is necessarily unique to each investor. That’s why buying something based upon what someone else thinks is just generally not a good idea. The conviction just won’t be there when it counts; when it needs to be.)

It may be, in certain cases, that paying a somewhat higher valuation for a business with clear and sustainable competitive advantages is wise. The reason is simple enough. Those with sustainable advantages will often generate durably high return on capital for long-term owners. In the very long run, it’s return on capital that primarily drives value creation and results.*

Return on capital provides a tailwind to the long-term investor (and, if current valuation is misjudged somewhat, it can help dig the investor out of a hole from time to time).

That’s no justification for unnecessarily paying premium prices. Even the best business operates in a world of uncertain outcomes, so paying a discount to conservative value in order to protect against what can’t be fully known remains a smart practice. The fact that many of these higher quality franchises with the great FMCG brands have done very well in the past guarantee nothing when it comes to the future. The best businesses can still be hurt by unforeseen difficulties — sometimes serious even if fixable — from time to time.

As with any business, financial strength as well as competent and honest management with wise capital allocation skills matters. Yet, if looking for businesses that generally have sustainable competitive advantages, companies like the above aren’t a bad place to start
(Even if, at this point, it requires the patience to wait for an attractive price to become available in the markets. An investor only has to buy a truly great business at the right price once. After shares of a good business are bought at a fair or better price, it’s the intrinsic value created by the business itself that does the heavy lifting when it comes to generating returns. In other words, no unusual trading skills required. In fact, trading likely just adds mistakes and lots of frictional costs.)

So are the best days behind these kinds of businesses? Is it too late? Well, maybe, but consider this:

Some think if an investment idea is well-known and seems obvious it can’t be really good. In 1938, Fortune Magazine concluded “Several times every year, a weighty and serious investor looks long and with profound respect at Coca-Cola’s record, but comes regretfully to the conclusion that he is looking too late.” Since that time, Coca-Cola has grown significantly both domestically and around the world. It was not too late in 1938, and we believe it is far from that today. – From the 1Q 2010 Yacktman Quarterly Letter

To me, the probability that a business like Coca-Cola will perform just fine, even if not quite as well, over a longer future time horizon is not low. Of course, in the short and even medium term, just about anything can happen to share prices.**

Yet, as the short-term “voting machines” gives way to the long-term “weighing machine”, share prices will at least roughly track increases to per share intrinsic business value. Well, that value is ultimately driven by business performance. Much as it was not too late for investors to benefit from Coca-Cola’s future prospects in 1938, it seems unlikely that it is too late now. Many, if not all the forces, that created these long-term results remain in place.

These are mostly durable high quality businesses — some, of course, more so than others –that produce high return on capital, at relatively lower risk, especially if bought at the right price.

As I’ve previously said, what’s sensible to buy at a plain discount doesn’t make sense at some materially higher valuation no matter how good the business may be.

They have a good probability of continuing to possess competitive advantages but, as always, an investor has to keep an eye on how the economic moat may be changing over time along with capital allocation decision-making by management.

When evaluating the quality of a business, one question worth asking is this: If a business stopped innovating for five years what would happen to its financial performance? Most consumer staples businesses would miss some opportunities, maybe lose some market share, yet would still likely continue to make a nice living and produce at least decent returns.***

Nothing catastrophic.

Not so for most tech stocks. Imagine Apple (AAPL), as good as the company is, not innovating for five years.

Not all so-called “defensive” stocks are created equal. Some of the better ones have more than solid “offensive” characteristics over a true investment time horizon. As I’ve said before that the reputation for these being defensive stocks isn’t incorrect, it’s just incomplete. The best of these businesses are not really just defensive, they’re higher quality.

Yes, these higher quality stocks usually have less than exciting near-term price action and volatility and are likely to do better in bear markets.
(Though they certainly can drop in price substantially from time to time even if per share intrinsic value does not…I mean, they’re still common stocks impacted by the psychology of market participants.)

Yes, they’re also likely to not do particularly well in bull markets. Anyone who expects the higher quality stocks to outperform during a bull market is likely to be disappointed.

That is, in part, how they have earned the reputation of being defensive. Yet, it’s when they’re looked at over longer time frames (more than a full business cycle or two) that the picture becomes more clear. This may be less exciting, I suppose, but for the long-term investor it should be the overall (full cycle) result and the exposure to relatively less risk that counts.
(Some no doubt attempt to jump in and out of these stocks depending on the market environment. Sounds good in theory but more likely just leads to added frictional costs and expensive errors of omission and commission.)

So these high quality businesses can provide both long-term offense and defense especially if purchased with an appropriate margin of safety in the first place.

Now I suspect one of the reasons why more professional investors do not make full use of, what Jeremy Grantham calls ”the one free lunch”, is this:

“Smart people aren’t exempt from professional disasters from overconfidence. Often, they just run aground in the more difficult voyages they choose, relying on their self-appraisals that they have superior talents and methods.” - Charlie Munger in a Speech to Foundation Financial Officers

Some seem to think that when a prudent but more straightforward approach comes along there must be more to it. Occasionally, there isn’t. When something like that comes along, seems reasonable to considering making some use of it. For many reasons, investing is already inherently difficult enough to do well. No need to make it more so. The difficulties come not just from the need to acquire the necessary investing skills and knowledge, but also from temperamental and psychological factors; from a keen awareness of one’s own limits.

“Warren and I have skills that could easily be taught to other people. One skill is knowing the edge of your own competency. It’s not a competency if you don’t know the edge of it. And Warren and I are better at tuning out the standard stupidities. We’ve left a lot of more talented and diligent people in the dust, just by working hard at eliminating standard error.” – Charlie Munger in the Stanford Lawyer (Page 19)

Finally, it’s worth considering that, too often, those stocks that seemingly provide the prospect of excitement price action and quick gains (i.e. the next big thing or “lottery ticket” stocks that sometimes capture the imagination of market participants) can just as easily produce some big and quick losses. Potential big winners often reside in the same neighborhood as potential big losers and sometimes, at least beforehand, they’re difficult to tell apart.

It only takes one big loss to undo a whole bunch of smart investments. Avoiding the material losses while minimizing trading and the related frictional costs is a good place to start.

So is buying everything with a sufficient margin of safety.

When losses and frictional costs get minimized, and shares are consistently bought cheap, it allows the magic of compounding real per share business value over time to be primary driver of long-term returns.

Adam

Established long positions in KO, PEP, PG, and AAPL at much lower than recent market prices

* With any investment, no matter how seemingly attractive, margin of safety is all-important. It protects against the unforeseen real, even if fixable, business problems. Still, it’s worth considering this thought from Charlie Munger at USC Business School in 1994: “If the business earns 6% on capital over 40 years and you hold it for that 40 years, you’re not going to make much different than a 6% return even if you originally buy it at a huge discount. Conversely, if a business earns 18% on capital over 20 or 30 years, even if you pay an expensive looking price, you’ll end up with a fine result.”
So the businesses that can maintain durable and attractive returns on capital has the wind at the back of an investor.
** As always, no views on the price action of marketable stocks are ever offered here. Those who choose speculation on stock price action — even if informed by fundamentals — over investment are participating in a very different game. There’s nothing wrong with speculation, of course, but it has less in common with investment than some might think. The investment process isn’t about price action, it’s about what a productive asset can produce with long-term effects mostly in mind. Consider what, in this interview, Warren Buffett had this to say: “Basically, it’s subjective, but in investment attitude you look at the asset itself to produce the return. So if I buy a farm and I expect it to produce $ 80 an acre for me in terms of its revenue from corn, soybeans etc. and it cost me $ 600. I’m looking at the return from the farm itself. I’m not looking at the price of the farm every day or every week or every year. On the other hand if I buy a stock and I hope it goes up next week, to me that’s pure speculation.”
*** In fact, remember what happened when Coca-Cola tried to “innovate” with New Coke?
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This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that’s familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.

Tags: Brand, CocaCola, Consumer, Global, Leads, Rankings

Thursday, May 23rd, 2013 Investments No Comments

Berkshire Hathaway 1st Quarter 2013 13F-HR

The Berkshire Hathaway (BRKa) 1st Quarter 13F-HR was released yesterday. Below is a summary of the changes that were made to the Berkshire equity portfolio.
(For a convenient comparison, here’s a post from last quarter that summarizes Berkshire’s 4th Quarter 13F-HR.)

There was plenty of buying and selling during the quarter. Here’s a quick summary of the changes:*

New Positions
Chicago Bridge & Iron (CBI): 6.51 million shares worth $ 376 million
Liberty Media (LMCA): 5.62 million shares worth $ 714 million**

Added to Existing Positions
Wells Fargo (WFC): Added 18.3 million shares worth $ 720 million, total stake now $ 18.0 billion
IBM (IBM): 6.50 thousand shares worth $ 1.3 million, total stake $ 13.6 billion
Wal-Mart (WMT): 1.75 million shares worth $ 139 million, total stake $ 3.93 billion

DirecTV (DTV): 3.24 million shares worth $ 211 million, total stake $ 2.43 billion
U.S. Bancorp (USB): 193.5 thousand shares worth $ 6.64 million, total stake $ 2.1 billion

DaVita (DVA): 1.37 million shares worth $ 178 million, total stake $ 1.95 billion (Previously disclosed in SEC filings. A “Standstill Agreement” between Berkshire-DaVita is now in place.)
National Oilwell Varco (NOV): 2.19 million shares worth $ 149 million, total stake $ 510 million
VeriSign (VRSN): 4.49 million shares worth $ 403 million
Wabco Holdings (WBC): 4.40 thousand shares worth $ 341 thousand, total stake $ 316 million

In the 1st quarter of 2013, there apparently was nothing purchased that was kept confidential. Berkshire’s 13F-HR filings will sometimes say: “Confidential information has been omitted from the Form 13F and filed separately with the Commission.”

Not this time.

Occasionally, the SEC allows Berkshire Hathaway to keep certain moves in the portfolio confidential. The permission is granted by the SEC when a case can be made that the disclosure may cause buyers to drive up the price before Berkshire makes its additional purchases.

Reduced Positions
BNY Mellon (BK): Sold 695 thousand shares worth $ 21 million, total stake $ 572 million
Mondelez International (MDLZ): Sold 5.79 million shares worth $ 182 million, total stake $ 222 million
Kraft Foods Group (KRFT): Sold 66.7 thousand shares worth $ 3.7 million, total stake $ 88.4 million

Sold Positions
Archer Daniels Midland (ADM)
General Dynamics (GD)

Todd Combs and Ted Weschler are responsible for an increasingly large number of the moves in the Berkshire equity portfolio, even if they still manage only a small percentage of the overall portfolio.

These days, any changes involving smaller positions will generally be the work of the two portfolio managers.

Top Five Holdings
After the changes, Berkshire Hathaway’s portfolio of equity securities remains dominated by financial (approaching ~ 40%) and consumer stocks (~ 30%).***

The remainder is primarily spread across technology (mostly IBM), then energy, communication services, healthcare, and industrials,.

1. Wells Fargo (WFC) = $ 18.0 billion
2. Coca-Cola (KO) = $ 17.2 billion
3. IBM (IBM) = $ 13.6 billion
4. American Express (AXP) = $ 11.0 billion
5. Procter and Gamble (PG) = $ 4.26 billion

As is almost always the case, it’s a very concentrated portfolio. The top five often represent 60-70 percent and, at times, even more of the equity portfolio. In addition to the above equity securities, Berkshire also has cash, fixed income, and other investments. The combined portfolio value (stocks, bonds, cash, and other investments) was just under $ 200 billion at the end of the most recent quarter.

The above portfolio, of course, excludes all the operating businesses that Berkshire owns outright with ~ 290,000 employees. That list of businesses includes: GEICO, General Re, National Indemnity, MidAmerican Energy, Burlington Northern Santa Fe, McLane Company, The Marmon Group, Shaw Industries, Benjamin Moore, Johns Manville, Acme Building, MiTek, Fruit of The Loom, Russel Athletic Apparel, NetJets, Nebraska Furniture Mart, See’s Candy, Dairy Queen, The Pampered Chef, Business Wire, Iscar Metalworking, Lubrizol and the Oriental Trading Company (among others).

The insurance businesses have naturally provided plenty of “float” for all these investments over time and continue to do so.

Adam

* All values based upon yesterday’s closing price.
** The Starz/Liberty Media spin-off was completed earlier this year (spin-off of Liberty from Starz). Liberty Media changed its name to Starz and trades as STRZA. The spin-off is called Liberty Media Corporation and trades as LMCA. These new shares are a reflection of the spin-off. So Berkshire now owns shares of both STRZA and LMCA.
*** Berkshire Hathaway’s holdings of ADRs are included in the 13F-HR. What is not included are the shares listed on exchanges outside the United States. The status of those shares (POSCO, Sanofi-Aventis, Tesco PLC, etc.) is updated in the annual letter. Things like the preferred shares in Bank of America are also not included in the 13F-HR. The only way any these stocks listed on exchanges outside the U.S. will show up in the 13F-HR is if Berkshire happens to buy the ADR.

Tags: 13FHR, 2013, Berkshire, Hathaway, Quarter

Saturday, May 18th, 2013 Investments No Comments

Charlie Munger: What Buying a Housing and Rabbit Hunting Have in Common

Charlie Munger recently weighed in on this past decade’s boom and bust in the housing market during an interview with CNBC’s Becky Quick.

In the interview, Charlie Munger took some time to use rabbit hunting as a way to help explain what happened during the housing crisis:

“Partly there was a time you felt foolish you didn’t buy a house because you weren’t making all the money everyone else was making, so it was a typical crazy boom. Now people have learned house prices can go down as well as up.”

Munger then added this:

“It’s like a fella who goes rabbit hunting and thoroughly enjoys himself. And then the rabbits haul out guns and start firing back. It would dim your enthusiasm for rabbit hunting and that’s what happened in the housing market.”

For another good example of a “typical crazy boom”,and the “rabbits” eventually “firing back”, consider long ago what happened to Sir Isaac Newton during the South Sea Bubble.

Chart: Isaac Newton’s Nightmare

Anyone who thinks that a high IQ is protection against foolish behavior should consider what happened to the otherwise often brilliant Sir Isaac.

The exchange about housing and rabbits starts at around the 24:12 point in the video. Check it out. Munger’s delivery often adds a bit of an edge to the words.

Here’s my summary of some of the other points that Charlie Munger made about what contributed to the real estate boom and subsequent crisis:

- We were building more houses than we needed leading inevitably to a glut driven by unwise home lending and bond financing. It was a combination of extreme stupidity and extreme immorality. This all led to what should not be considered an unexpected result (Munger also described it as “craziness and crookedness”).

- Both the government and private sector had a role in it. Stupidity, incompetence, and venality behind it.

“We were exceptional in stupidity and immorality and we paid the price.”

- We’ve learned our lesson either not at all or only somewhat. The new rules meant to reign in the worst behavior aren’t strong enough. Take the easy money out of the system.

“The people who used to make the money they can hardly wait to start doing it again. The rest of us are going to have to curtail them.”

- There’s nothing wrong with pro-housing policies. We just don’t need housing loans that aren’t sound. We don’t need a policy that leads to building lots of unneeded houses. We don’t need the “fraud and folly” in the business of issuing securities who’ll unload them on whoever will buy them.

These sorts of things combined with excess leverage (much of it via cheap and what probably seemed at the time like reliably available short-term funding) and insufficient liquidity among other things was just asking for trouble.

There needs to be stronger limits in place to prevent the same set of behaviors that got us into trouble from re-emerging. Maybe this has been accomplished to some degree, but Charlie Munger seems far from convinced of this. Some of the excesses — probably in some creative new form — seem certain to come back if we aren’t careful to prevent it.

The interview is well worth listening to in its entirety. As is often the case, Charlie Munger had many other useful and insightful things to say.

Adam

Tags: Buying, Charlie, Common, Housing, Hunting, Munger, Rabbit

Thursday, May 16th, 2013 Investments No Comments

2013 Berkshire Hathaway Shareholders Meeting Part I: Not Picking Stocks By The Numbers

***Update: Separated this post into Part I & Part II. The bottom half of the original version of this post is now in Part II.***

In an interesting exchange at the 2013 Berkshire Hathaway (BRKa) shareholder meeting, Warren Buffett and Charlie Munger made it clear that, for them, the numbers play a lesser role than some might otherwise think when it comes to picking stocks.

Their focus is on how a business (whether buying an entire business or shares of the business) will be doing in ten years or so. For Buffett and Munger, it’s about what the competitive advantages will look like many years from now.

Here’s part of the exchange as summarized by the Wall Street Journal’s live blog of this year’s meeting:

“We are looking at businesses exactly like we are looking at them if somebody came in and asked us to buy the whole business,” Buffett said. He said they then want to know how it will do in ten years.

Munger was even more forceful: “We don’t know how to buy stocks by metrics … We know that Burlington Northern will have a competitive advantage in years … we don’t know what the heck Apple will have. … You really have to understand the company and its competitive positions. … That’s not disclosed by the math.

Buffett: “I don’t know how I would manage money if I had to do it just on the numbers.”

Munger, interupting, “You’d do it badly.”

It’s mostly not about the numbers but I’m guessing at least some who hear or read this don’t completely believe it. There’s got to be more of a heavy numerical emphasis in their analysis, right?

Nope.

Maybe those who don’t quite buy this are picturing instead something like these huge proprietary Berkshire spreadsheets, other complex analytical tools and methods, that they just aren’t willing to reveal. That’s simply not the case. Most of what matters whether buying pieces of businesses (in the case of marketable stocks) or buying entire businesses can’t be seen in the numbers. Consider this Wall Street Journal article from a while back on how Buffett likes to operate:

He keeps no calculator on his desk, preferring to do most calculations in his head. “I deplore false precision in math,” he says, explaining that he does not need exact numbers for most investment decisions.

And this comment from Charlie Munger during his 2003 UC Santa Barbara speech that I’ve referenced before:

“You’ve got a complex system and it spews out a lot of wonderful numbers that enable you to measure some factors. But there are other factors that are terribly important, [yet] there’s no precise numbering you can put to these factors. You know they’re important, but you don’t have the numbers. Well practically (1) everybody overweighs the stuff that can be numbered, because it yields to the statistical techniques they’re taught in academia, and (2) doesn’t mix in the hard-to-measure stuff that may be more important. That is a mistake I’ve tried all my life to avoid, and I have no regrets for having done that.”

Understanding competitive advantages and whether they will remain in place for a very long time matters a whole lot. Yet much of what’s important in this regard just isn’t quantifiable or, at least, can’t be measured very well.

Naturally the numbers matter to an extent. It’s just that some assume that valuations need to be estimated via complex methods. They don’t. In fact, with investing it is the simple methods that are often more useful. Approximate value does have to be estimated in a meaningful way but doesn’t require a bunch of complex calculations and higher forms of math. Additional unneeded complexity often just leads to precisely the wrong answers.

A good understanding of accounting is important, of course. Unfortunately, the accounting numbers are only a starting point and have to be translated into something economically meaningful. That’s not necessarily an easy thing to do consistently well.

There are many ways to misjudge a business if an investor doesn’t know how to read and interpret what’s in a 10-K, 10-Q, and other SEC filings. Again, interpreting the financial statements is important, but much of what matters in investment analysis is not going to be found in the numbers.

I’ll get to more from the meeting in a follow up.

Adam

Long position in BRKb established at much lower than recent prices

This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that’s familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and are never a recommendation to buy or sell anything.

Tags: 2013, Berkshire, Hathaway, Meeting, Numbers, Part, Picking, Shareholders, Stocks

Monday, May 13th, 2013 Investments No Comments

Buffett on Bonds and Productive Assets

From this past Monday’s interview of Warren Buffett by CNBC’s Becky Quick:

“I bought a piece of real estate in New York in 1992, I have not had a quote on it since. I look to the performance of the assets. Maybe…my piece of real estate have had pull backs, but I don’t even know about ‘em. People pay way too— way too much attention to the short term. If you’re getting your money’s worth in a stock, buy it and forget it.”

He then added this on interest rates and how they affect all other assets:

“Real estate, farms, oil, everything else…they’re the cost of carrying other assets. They’re the alternative. They’re the yardstick.”

They may be the yardstick, but the time to buy certainly isn’t when the world is free of trouble.

“…the fact that there are troubles in Europe, and there are plenty of troubles, and they’re not going go away fast, does not mean you don’t buy stocks. We bought stocks when the United States was in trouble, in 2008 and— and it was in huge trouble and we spent 15 1/2 billion in three weeks in— between September 15th and October 10th.

It wasn’t because the news was good, it was because the prices were good.”

He also said that, while he doesn’t have any idea when, some day bond yields will be a lot higher.

“Oh…it’s going to happen. And question is…the question is always when. I’m no good on that. The question is to what degree it happens. But you could have interest rates very significantly different than what they are now— in some reasonable period in the future.

It’s not a game that I can play. I mean, I— I don’t have any special insight into that sort of thing…”

As far as Buffett’s concerned stocks might have been cheap not long ago, but they’re now merely decent values.

“In terms of stocks, you know, stocks are reasonably priced. They were very cheap a few years ago. They’re reasonably priced now. But stocks grow in value over time because they retain earnings…”

Bonds, on the other hand…

“There could be conditions under which we…would own bonds. But— they’re conditions far different than what exist now.”

Becky Quick then pointed out that her co-host on CNBC’s Squawk Box, Joe Kernen, went into a retirement specialist recently. The specialist said he should be 40% in bonds. Buffett’s response was “you shouldn’t be 40% in bonds.” He said investors with the “proper attitude” should have “enough cash on hand so they feel comfortable, and then the rest in equities…”

He then added:

“I would have productive assets. I would favor those enormously over fixed dollars investments now, and I think it’s silly — to have some ratio like 30 or 40 or 50% in bonds. They’re terrible investments now.”

Of course, productive assets include not just equities (pieces of businesses) but naturally also entire businesses, as well as things like farms and real estate. As always, they must be attractive assets bought at attractive valuations. Even the best asset can be a dumb and risky investment at the wrong price.

Now, what Buffett meant by “proper attitude” is that equities only makes sense for those that won’t be bothered if stocks were to go down meaningfully. He used 20% over the next month to help make his point but it’s not really about a specific percentage.* Those that tend to react the wrong way to negative price action aren’t likely to do very well in equities. In fact, those who react emotionally to price action in either direction will likely end up with poor results in the long run. That investors tend to buy and sell at the wrong times is, unfortunately, an all too reliable pattern. Buying when the news appears good and selling when the outlook appears less rosy or seems more uncertain isn’t a brilliant way to invest. The fact that favorable outlook makes it feel safer doesn’t mean that it is. All else equal, the higher prices that will generally prevail during the good times increases the risk of permanent capital loss (and, of course, lower prices reduce that risk). The intrinsic value of most quality productive assets simply doesn’t move around nearly as much as stock market prices. Buying when the skies are clear then selling during the storm is a great way to pay more than necessary for assets and, ultimately, sell them for too little.

More risk, less reward.

It’s clearly not impossible to counteract this tendency but that starts with being aware of it.

Buffett’s not always against the ownership of bonds by the way. In the interview, he points out that he made a lot of money in zero coupon bonds in the early 1980s and added that “…the price of everything determines its attractiveness.”

Buffett said that a few years ago “The news was terrible, but the stocks were cheap, you know. News is better now. Stocks are higher. They’re still not— they’re not ridiculously high at all, and bonds are priced artificially. You’ve got some guy buying $ 85 billion a month. (LAUGH) And— that will change at some point. And when it changes, people could lose a lot of money if they’re in long-term bonds.”

Much later in the interview, Buffett once again talked about the folly of trying to buy and sell stocks based on current news. He said those that do this are “giving away an enormous advantage” then added:

“…I bought a farm in 1985, I haven’t had— had a quote on it since.

But I know what it’s produced every year. And I know it’s worth more money now. You know, it— if I’d gotten a quote on it every day and somebody’s said, “You know, maybe you oughta sell because there’s, you know, there’s clouds in the West,” or something. (LAUGH) It’s — it’s crazy.”

Investment, in contrast to speculation, has as its focus what a productive asset can produce over a long time frame. Of course, what you pay for that asset — whether it be an entire business, part of a business, or a farm. or other real estate — matters. Many think of the stock market primarily in terms of where prices will be over the near or even intermediate term. Learning to think primarily about what something will produce over time instead of price action can make all the difference.

In this recent post I mentioned that Buffett last year said “bonds should come with a warning label.” Then, as now, he wasn’t saying when yields would rise. Getting the timing right is always difficult at best. In fact, it is mostly a waste of energy or worse. The good news is that timing things consistently well is not a requirement when it comes to getting attractive investment results. Look no further than Warren Buffett himself for evidence of this.

As Donald Yacktman and his team like to say“ “It’s almost all about the price.”

That just about sums it up. It’s buying productive assets, particularly those that the individual investor understands well, at a price that represents a nice discount to per share intrinsic value.

Adam

* To make his point about the “proper attitude”, Buffett used stocks going down 20% in the next month as an example. In this interview back in 2009, Charlie Munger talked about stocks dropping more like 50%:

“I think it’s in the nature of long term shareholding of the normal vicissitudes, in worldly outcomes, and in markets that the long-term holder has his quoted value of his stocks go down by say 50%.”

The point isn’t really the percentage. It’s to focus on what an asset is intrinsically worth and buy it cheap enough instead of focusing on what the quoted price happens to be on any given day. If cheap, and you want more of a particular asset, buy more. If expensive, and you want less of the asset, then maybe sell. Otherwise, ignore the quoted prices and use that energy making sure value has been judged well. Better yet, if justifiably confident about an assets prospects, expend that energy elsewhere once enough shares are owned at an attractive valuation. The bottom line is to keep fear and greed in check and just mostly ignore the quoted prices. Emotional reactions cloud investment judgments and destroy returns.
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This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that’s familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.

Tags: Assets, Bonds, Buffett, Productive

Saturday, May 11th, 2013 Investments No Comments

2013 Berkshire Hathaway Shareholders Meeting Part II: Buffett on Timing Purchases

***Update: Separated today’s earlier post into Part I & Part II. A shorter version of the following was initially in Part I***

According to The Motley Fool, here’s what Warren Buffett said at the 2013 Berkshire Hathaway (BRKa) shareholder meeting about attempting to time the purchase of marketable securities:

“If they try to time their purchases they will do very well for their broker and not very well for themselves.”

The right time to buy or sell any asset is rarely if ever obvious.

The right price to pay for an asset may not be an easy thing to figure out but is, by comparison, at least doable with some work (and a reasonably solid understanding of business economics, of course).

Those that try to get the timing and price right are making the job more difficult than it needs to be. When something becomes plainly expensive, avoid it. When something becomes plainly cheap, buy it. Always buy with a plain margin of safety. Do these things consistently well and timing things right becomes far less relevant in the long run.

It is as Seth Klarman said in his 2010 Annual Letter:

“Risk is not inherent in an investment; it is always relative to the price paid.”

What’s sensible and low risk at one price is risky at some higher price. Getting that right consistently is difficult enough.

Add timing to the equation and errors of omission along with other misjudgments are almost certain to increase.

In the short run (and even longer), poorly timed investments can certainly lead to temporary paper losses — sometimes rather substantial. Market prices in the short run can do just about anything.* That’s a problem for those who speculate on price action. Yet, for actual long-term investments, a declining price shouldn’t matter as long as the price paid represents a discount to real per share intrinsic value and the business has attractive and durable core economics. If anything, it is a net benefit since more shares can be bought below value.

So getting the timing wrong matters little in the long run if an investor generally judges the price versus value of a good business correctly in the first place. In the short run, the “voting machine“ can create nonsensical prices but, in the long run, the “weighing machine” will adjust to something that more closely reflects real per share intrinsic business value.

It’s only when price versus value is judged poorly that the long-term investor becomes exposed to the risk of permanent capital loss.

It’s getting the valuation roughly right — within a range — then make purchases with an appropriate margin of safety to account for most of the worst outcomes.

The appropriate margin of safety is necessarily different for each investment.

For the long-term investor, getting price versus value right is all-important. Attempts to also get the timing right is often just a foolish distraction and, worst case, very costly.

Tempting, yes, but generally unwise.

Adam

Long position in BRKb established at much lower than recent prices

* Paper losses may not be pleasant but consider this: When a business that isn’t public is bought (with the intent to own it longer term), the new owner(s) generally will not focus on what someone else tells them it is worth day after day (or, in the case of the stock market, every second). They focus on the income stream the business produces. They focus on whether that stream of income relative to the price they paid remains attractive. They don’t sit their considering what other “voters” are saying the business is worth in the short-term or even longer. To a business owner, the price of only matters when buying or selling. It’s the same for a partial owner of a business but unfortunately the minute-by-minute quoted value becomes a distraction for many market participants. It is only those speculating on market price action who should expend their energy thinking about near-term quoted prices.
** Missing the chance to build a meaningful position in (or missing entirely) a well understood business you like that was at one point was sensibly priced.
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This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that’s familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and are never a recommendation to buy or sell anything.

Tags: 2013, Berkshire, Buffett, Hathaway, Meeting, Part, Purchases, Shareholders, Timing

Thursday, May 9th, 2013 Investments No Comments

Apple’s Debt Offering: Investor Enthusiasm For Corporate Bonds Continues

Earlier this week, Apple (AAPL) sold the largest corporate non-financial bond deal in history.

$ 17 billion

It wasn’t just historically large, the cost of the funds themselves were historically low.

The huge decline in Treasury interest rates — a key driver of corporate debt — has led to some incredibly cheap funding for companies. Some that don’t, in many ways, even seem to really need it in an operational sense but, if your stock happens to be cheap (or you’d like to refinance some expensive debt), quite an opportunity.*

The 10-year Treasury currently has a yield of ~1.75%. This compares to a little over 15x earnings for stocks in the S&P 500 according to these estimates. Of course, expressed as an earnings yield (inverse price to earnings) that would be ~ 6.6%.

A quick summary of Apple’s debt deal:

3-year variable: $ 1 billion at .33%
5 year variable: $ 2 billion at .53%
—
3 year fixed: $ 1.5 billion at .511%
5 year fixed: $ 5.0 billion at 1.076%
10 year fixed: $ 5.5 billion at 2.415%
30-year fixed: $ 3.0 billion at 3.883%
Total: $ 17 billion at 1.85%**

Forbes: Apple Bond Summary

Let’s step back a bit. This Wall Street Journal article points out that, according to Lipper (a unit of Thomson Reuters), a record $ 55 billion flowed into bond mutual funds and investment-grade bond ETFs over the first 17 weeks of 2013.

So there’s plenty of demand these days with investors buying especially the higher quality corporate bonds undeterred by the rather low yields.

Well, as a comparison, consider this article written back in February of 2000. It points out how willing investors were to invest in aggressive, high-risk equity funds at a time when stock were quite expensive and, as it turned out, near their peak.

“…investors are gravitating toward–not running away from–high-growth, high-risk sectors thus far in 2000.”

So there was plenty of demand for stock funds especially the riskiest variety:

“…Janus, Fidelity, Vanguard and Invesco, reported extremely strong flows in January, a month that saw much market volatility. Much of the money is going into technology, telecom, biotechnology and/or growth funds, company officials say.

In December, ‘aggressive-growth’ funds attracted $ 11.5 billion in net new money, whereas more conservative “growth-and-income” funds saw net redemptions of nearly $ 6 billion.

‘That’s just unheard of,’ said Carl Wittnebert, director of research for the Santa Rosa, Calif.-based research firm Trimtabs.com. ‘The public has developed this wild appetite for risk.’

Meanwhile, investors have all but lost their appetite for bond funds, coming off a year in which rising interest rates hurt the principal value of many bond portfolios. Taxable bond funds saw outflows of $ 6.2 billion in December.”

At that time, stocks were already expensive by any measure — a number were selling at 30x, 40x, 50x earnings and much more — and the 10-year Treasury was 6.6% (coincidentally, same as the S&P 500′s earnings yield right now). So back then, it was pretty close (though not exactly) to the opposite of where we are today as far as valuations go. In the year 2000, investor enthusiasm for stocks was rather high and money was flowing into stock funds — especially the riskiest variety — when they were quite expensive.***
(Keep in mind that the riskier funds would likely have owned stocks selling for higher than average multiples of earnings — if there was any earnings at all — at that time.)

Now, the enthusiasm is for bonds and record levels of money is flowing into bond funds — especially the seemingly safest variety. Instead of the “wild appetite for risk” that existed in 2000, many investors seem to have a “wild appetite for safety”.

Or, at least, perceived safety. The problem is that safety might be mostly illusion.

I’m not suggesting stocks in general are cheap these days. To me, they are not generally cheap (though there certainly are some not particularly expensive individual securities). It’s just that investors who are now pouring their money into higher quality bonds these days should be considering carefully whether today’s yield really provides sufficient compensation considering the risks. Bonds may be perceived as generally safer but the risk that’s taken always is determined by the price one has to pay. When it comes to bonds or currency-based investments in general, I think Warren Buffett said it best in last year’s letter:

“Investments that are denominated in a given currency include money-market funds, bonds, mortgages, bank deposits, and other instruments. Most of these currency-based investments are thought of as “safe.” In truth they are among the most dangerous of assets.”

Buffett later added this:

“Right now bonds should come with a warning label.”

What’s sensible to buy at one price is highly risky at another price. It is as Seth Klarman said in his 2010 Annual Letter:

“Risk is not inherent in an investment; it is always relative to the price paid.”

I’m also not suggesting that the enthusiasm for bonds is the equivalent to the extreme enthusiasm for stocks in the late 1990s into 2000. Whether that’s the case will likely only become broadly obvious at some point down the road. Still, what does seem obvious is that bonds provide little in the way of margin of safety these days and lots of downside long-term near prevailing prices.

Some other items of note on the Apple bond offering:

- The bond offering was Apple’s first in almost 20 years.

- According to Reuters, the offering brought in than $ 50 billion in orders. So lots of demand to say the least.

- The company was able to borrow at nearly triple-A rates but not quite. Apple’s debt is rated AA-plus by Standard & Poor’s.

- Microsoft Corp. (MSFT), with its AAA debt rating, sold 10-year bonds at a yield of 2.413% last week; almost the exact same rate as Apple with its slightly lower debt rating.

- Apple sold the three year floating-rate bonds at 0.05 percentage points over the 3-month London interbank offered rate (LIBOR).

- Apple sold the five year floating-rate bonds at 0.25 percentage points over the 3-month LIBOR.

This borrowing will help, in part, fund a plan to return $ 100 billion to shareholders (dividends plus $ 60 billion in buybacks) by the end of 2015.

Apple has tons of cash, of course. More than enough to fund a buyback and pay the dividends they have in mind. The problem has been that much of it is overseas and not accessible without incurring taxes (if the funds were brought back to the United States). Raising cash in the bond market helps the company avoid that tax bill.

The company’s 1.85% is less than the company’s dividend (and much less than the company’s earnings yield, of course) so each share they buyback will eliminate more in dividend payments than the cost of the funds themselves.

Adam

Bloomberg: Apple Raises $ 17 billion in Record Corporate Bond Sale

Long positions in AAPL and MSFT established at much lower than recent prices

* These low cost funds should eventually lead to more acquisitions and maybe even some incremental investments (capital expenditures, new business ventures, etc.) once animal spirits return with greater force. Who knows when but, sooner or later, it generally comes back.
** With 3 month LIBOR at current levels for the variable portion.
*** It was not just tech stocks that were expensive, even if it was their valuations that were the most extreme. Coca-Cola (KO) and General Electric (GE) are just two examples of non-tech stocks that had extraordinarily high valuations.
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This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that’s familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and are never a recommendation to buy or sell anything.

Tags: Apple's, Bonds, Continues, Corporate, Debt, Enthusiasm, Investor, Offering

Saturday, May 4th, 2013 Investments No Comments

Investor Overconfidence

Roughly a year ago, Fidelity released a poll indicating that 91% of their “active investors” expect to equal or beat the returns of the stock market over the next year.

More specifically, 62% apparently expected to do better than the market and 29% expected to match market performance.

So only 9% expected to do worse.

Well, maybe Fidelity has an exceptional group of investors compared to the average but, more likely, this is just another example of investor overconfidence. Now, it’s certainly possible quite a few might do just fine over a shorter time frame like one year, but there is just overwhelming evidence that most investors do rather not at all well against the stock market over the longer haul. From this paper by Professor Terrance Odean and Professor Brad Barber:

“The majority of the empirical evidence indicates that individual investors, in
aggregate, earn poor long-run returns and would be better off had they invested in a low-cost index fund. This evidence of poor performance is particularly compelling when we
include transaction costs (e.g., commissions, bid-ask spreads, market impact, and
transaction taxes). While transaction costs are an important component of the shortfall, a
second component is the poor security selection ability of individual investors
documented in many studies that we reviewed in the prior section. These observations
lead one to wonder why investors trade so much and to their detriment.”

This doesn’t just apply to individual investors, of course.*

“Most people think they can find managers who can outperform, but most people are wrong. I will say that 85 percent to 90 percent of managers fail to match their benchmarks. Because managers have fees and incur transaction costs, you know that in the aggregate they are deleting value.” – Jack Meyer, former President and CEO of the Harvard Management Company from 1990 to 2005, on investment managers

“Of the 355 equity funds in 1970, fully 233 of those funds–almost two thirds–have gone out of business. Only 24 outpaced the market by more than one percentage point a year–one out of every 14. Let’s face it: These are terrible odds!.” – John Bogle in The Little Book of Common Sense Investing
(This quote, and others from the book, can be found here.)

“The statistical evidence proving that stock index funds outperform between 80% and 90% of actively managed equity funds is so overwhelming that it takes enormously expensive advertising campaigns to obscure the truth from investors.” – From The Motley Fool

The Fidelity study is just another good example of how overconfidence impacts investor behavior and results. This paper, also by Professor Odean and Professor Barber, adds this thought:

“Active investment strategies will underperform passive investment strategies. Overconfident investors will overestimate the value of their private information, causing them to trade too actively and, consequently, to earn below-average returns.”

The Fidelity study also indicated that roughly two-thirds claimed they had matched or outperformed over the past twelve months; 80% claimed they had done the same the year before.

This MSN Money article rightfully compares these results to surveys of driving ability that reveal people are often hopelessly optimistic about their own driving skills. Well, it’s not much different for professionals. I’ve referenced this Charlie Munger quote before but it is relevant because :

“…in self appraisals of prospects and talents it is the norm, as Demosthenes predicted, for people to be ridiculously over-optimistic. For instance, a careful survey in Sweden showed that 90% of automobile drivers considered themselves above average. And people who are successfully selling something, as investment counselors do, make Swedish drivers sound like depressives. Virtually every investment expert’s public assessment is that he is above average, no matter what is the evidence to the contrary.” - Charlie Munger speaking to Foundation Financial Officers in 1998

He also later added…

“Smart, hard-working people aren’t exempted from professional disasters from overconfidence. Often, they just go aground in the more difficult voyages they choose…” - Charlie Munger speaking to Foundation Financial Officers in 1998

Part of the problem is that some judge, inadvertently or not, that they’ve performed better than they have in reality; that an objective comparison of returns produced by all positions held in all accounts over time to an appropriate index would reveal lesser results. The MSN Money article makes the point that “there is a difference between judgmental performance — what you think you gained — and actual performance,” with the result being participants not necessarily measuring themselves objectively.

Modern Portfolio Theory, Efficient Markets, and the Flat Earth Revisited

“…Berkshire’s whole record has been achieved without paying one ounce of attention to the efficient market theory in its hard form. And not one ounce of attention to the descendants of that idea, which came out of academic economics and went into corporate finance and morphed into such obscenities as the capital asset pricing model, which we also paid no attention to.” – Charlie Munger Speech at UC Santa Barbara back in 2003

With this year’s Berkshire Hathaway (BRKa) annual shareholder meeting coming up soon, I decided to take a little time to browse some of the notes taken at past meetings.

As always, lots of useful stuff that’s well worth reading (and, I guess in my case, re-reading). Well, one exchange that caught my attention comes from the 2006 meeting. At that meeting, Warren Buffett and Charlie Munger covered the subject of efficient market hypothesis (EMH) and modern portfolio theory (MPT) a bit.

Here’s what they had to say about EMH and MPT at the 2006 meeting according the notes taken by The Motley Fool:*

Warren Buffett: The teaching of finance has improved over the past 20 years, but from a very low base. The flat-Earth orthodoxy of 20 years ago, of modern portfolio theory and the efficient market hypothesis, is breaking down. [The universities] of Kansas, Missouri, Florida, Columbia, and Stanford, among others, have good programs. Twenty-five years ago, you couldn’t get a job or advance if you didn’t go along with the EMH [Efficient Market Hypothesis] and MPT [Modern Portfolio Theory] orthodoxy.

Nowadays, students all think they’ll get rich doing what Charlie and I do. The amount of brainpower going into money management is somewhat distressing, but it’s a great time to be 20 or 25 years old and be getting out of school. A lot of students who come to visit say that they want to go into private equity or hedge funds. I’m not sure what the economy is going to do for basics like food and clothes.

Charlie Munger: Half of the business school graduates at the elite Eastern schools say that they want to go into private equity or hedge funds. Their goal seems to be to keep up with their cohorts at Goldman Sachs (NYSE: GS). This can’t possibly end well.

At that same meeting they later had the following to say:

Charlie Munger: Finding a single investment that will return 20% per year for 40 years tends to happen only in dreamland. In the real world, you uncover an opportunity, and then you compare other opportunities with that. And you only invest in the most attractive opportunities. That’s your opportunity cost. That’s what you learn in freshman economics. The game hasn’t changed at all. That’s why Modern Portfolio Theory is so asinine.

Warren Buffett: It really is, folks.

Charlie Munger: If Warren were starting today, he’d put together a concentrated portfolio. Your one or two best ideas are way better than the rest. So when you act, you’re thinking about how the alternatives compare with your best idea. But you don’t want to own your 10th-best idea when you can use that cash to invest in your best idea.

Warren Buffett also brought the same subject up in the 2006 letter, using the record of Walter Schloss as an example:**

“I first publicly discussed Walter’s remarkable record in 1984. At that time ‘efficient market theory’ (EMT) was the centerpiece of investment instruction at most major business schools. This theory, as then most commonly taught, held that the price of any stock at any moment is not demonstrably mispriced, which means that no investor can be expected to overperform the stock market averages using only publicly-available information (though some will do so by luck). When I talked about Walter 23 years ago, his record forcefully contradicted this dogma.

And what did members of the academic community do when they were exposed to this new and important evidence? Unfortunately, they reacted in all-too-human fashion: Rather than opening their minds, they closed their eyes. To my knowledge no business school teaching EMT made any attempt to study Walter’s performance and what it meant for the school’s cherished theory.

Instead, the faculties of the schools went merrily on their way presenting EMT as having the certainty of scripture. Typically, a finance instructor who had the nerve to question EMT had about as much chance of major promotion as Galileo had of being named Pope.

Tens of thousands of students were therefore sent out into life believing that on every day the price of every stock was ‘right’ (or, more accurately, not demonstrably wrong) and that attempts to evaluate businesses – that is, stocks – were useless. Walter meanwhile went on overperforming, his job made easier by the misguided instructions that had been given to those young minds. After all, if you are in the shipping business, it’s helpful to have all of your potential competitors be taught that the earth is flat.”

At least there seems to be some progress, however painfully slow it has unfortunately been, in academia and elsewhere on this front.

For quite a while it seemed like that would never happen.

These days, fewer buy into this stuff but there is still, remarkably, no shortage of adherents. I think Marty Whitman has it about right when he said the following about modern portfolio theory in this Barron’s interview:

“…as far as value investing, control investing, distress investing and credit analysis is concerned, that stuff is absolute garbage.”

Here’s what Buffett said more recently about efficient markets in the 2010 Berkshire Hathaway Shareholder Letter:

“John Kenneth Galbraith once slyly observed that economists were most economical with ideas: They made the ones learned in graduate school last a lifetime. University finance departments often behave similarly. Witness the tenacity with which almost all clung to the theory of efficient markets throughout the 1970s and 1980s, dismissively calling powerful facts that refuted it ‘anomalies.’ (I always love explanations of that kind: The Flat Earth Society probably views a ship’s circling of the globe as an annoying, but inconsequential, anomaly.)”

To me, whether the criticism happens to be delivered politely, sarcastically or– in the case of Charlie Munger or Marty Whitman — maybe a bit more harshly, it seems just as valid. These ideas aren’t necessarily just useless, they’re actually capable of doing real economic damage over time.

With this example in mind, I’ll never again be surprised by how long certain extremely flawed ideas persist when, on merit, they should not.

Adam

* Since these are notes it’s not possible to know if the quotes are exact, of course.
** From the 2006 letter: “Following a strategy that involved no real risk – defined as permanent loss of capital – Walter produced results over his 47 partnership years that dramatically surpassed those of the S&P 500.”

Buffett then added…

“There is simply no possibility that what Walter achieved over 47 years was due to chance.

Tags: Earth, Efficient, Flat, Markets, Modern, Portfolio, Revisited, Theory

Wednesday, May 1st, 2013 Investments No Comments

Worldwide Daily Beverage Consumption

Back in the year 2000, the worldwide daily beverage consumption totaled roughly 48 billion servings.

At that time, Coca-Cola’s (KO) shares of this consumption was a bit over 2 percent.

Roughly 1 billion servings each day.

These days, the worldwide number of servings consumed per day has increased to 57 billion with Coca-Cola’s share now at 3.2 percent.

So, via what is the world’s largest beverage distribution system, Coca-Cola now accounts for roughly 1.8 billion servings each day and the company now reaches consumers in 200 plus countries.

Some simple math shows that Coca-Cola picked up 8.9 percent of the 9 billion servings of incremental daily beverage consumption since the year 2000.*
(The .8 billion increase in Coca-Cola’s volume — from 1 billion to 1.8 billion — divided by the difference between the estimated worldwide daily beverage consumption in 2012 compared to 2000.)

More than its fair share of the increased consumption. If it continues, Coca-Cola will naturally get an increasing share of worldwide daily beverage consumption over time. We’ll see if it does but, considering the company’s advantages, it seems not a stretch to expect them to continue doing just fine in this regard.

The bad news is that carbonated beverage sales in the U.S. remains challenging. The good news is a bunch of the company’s profits come from elsewhere with no shortage of opportunity in the emerging markets.

Carbonated beverage sales are also a challenge in Europe but the region still remains a nice source of profits.

See page 34 of the latest 10-Q or page 57 of the latest 10-K for more details on the company’s operating income and margins in different parts of the world.

This Fortune article points out that the average American consumes 400 servings of Coca-Cola products each year. That number includes non-soda beverages, of course. The American beverage market seems rather saturated to say the least.

Global average consumption of Coca-Cola products is more like roughly 90 servings each year.

Over time no doubt that gap should be an opportunity though it likely closes rather slowly over time.

Coca-Cola will certainly — like any business — have its ups and downs but the company currently has very attractive core business economics.

High and durable return on capital.

Chances are good the company will continue to have very sound economics even if possibly somewhat less so than in the past.

So it remains quite a business with lots of prospects but, unfortunately, the stock seems awfully expensive these days.

Adam

Long position in KO established at much lower than recent prices. No intention to buy or sell near current prices.
—
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that’s familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and are never a recommendation to buy or sell anything.

Tags: Beverage, Consumption, Daily, Worldwide

Saturday, April 27th, 2013 Investments No Comments

Investment Blog & News

Investments

Coca-Cola Leads Global Consumer Brand Rankings

Berkshire Hathaway 1st Quarter 2013 13F-HR

Charlie Munger: What Buying a Housing and Rabbit Hunting Have in Common

2013 Berkshire Hathaway Shareholders Meeting Part I: Not Picking Stocks By The Numbers

Buffett on Bonds and Productive Assets

2013 Berkshire Hathaway Shareholders Meeting Part II: Buffett on Timing Purchases

Apple’s Debt Offering: Investor Enthusiasm For Corporate Bonds Continues

Investor Overconfidence

Modern Portfolio Theory, Efficient Markets, and the Flat Earth Revisited

Worldwide Daily Beverage Consumption

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